More on China
China continues to make news these days. Unabated economic growth has put the country at the forefront of global economic power players. It is now back to double-digit growth barely a year after the worst recession since the Great Depression hit all major financial markets and economies. But despite economic progress, China also continues to mystify foreigners, in particular foreign investors. Personally, I claim no knowledge of understanding Chinese politics, its society and its people nor would I be in a position to advise on the merits of investing in China. Yet, with growth rates at about 10% and a re-ignited property boom, one could easily be tempted into investing - perhaps a Chinese focused Mutual Fund or ETF? But let us take a step back first...
Investing in China, whether directly or via one of the many investment vehicles, comes with a long list of caveats. Even the big multi-nationals (most recently Google) could sing a litany of songs about corruption, red-tape, cultural and language issues, all of which can weigh heavily on investment returns. And how about all the fabulous stories of growth, exuberance and unheard-of property prices?
I find it tough enough to trust the official economic numbers of the US or the European Union, how much more must one question official data from a command economy like China. So let's forget about everything that China says and focus on a few things they have done and continue to do as we speak. I will use a few charts to help illustrate some important milestones....
As late as 1981, China started to actively massage its exchange rate versus the US$ with a clear long-term objective: To devalue the Renminbi to gain a massive competitive pricing advantage for their exports. In 1981, when the US and Europe were united in fear that Japan would be the dominant global economic powerhouse, the Renminbi was trading around 1.5 versus the US Dollar. In subsequent years, the currency was allowed to depreciate allowing the USD/CNY rate to reach up to 8.7 Yuan per US Dollar. A few years back, when the then US Treasury Secretary Paulson argued that the Chinese currency was about 40% undervalued, it was quite an understatement in historic perspective.
CNY
From a macro perspective, the exchange rate movements of the Renminbi are in stark contrast with those of Japan and Germany, two similarly export-driven economies that saw their country rise from economic insignificance after WWII to major export nations by the 1970s and 80s. As their economies grew, so did their exchange rate gain in value against the US$, particularly after the Bretton-Woods agreement was abandoned and currencies were allowed to freely float in the early 70's. The example of the Japanese Yen clearly shows how the Japanese Yen gained about three times the value against the US$ just before Japanese Equities reached their all-time high in 1990.
JPY-historic
China, by contrast, embarked on an export-driven model with a simple principle: produce as much as possible and sell it as cheap as possible. Aided by the 8:1 pricing advantage achieved between 1980 and the mid-90s, China was able to undercut all competing countries while still retaining massive profit margins. The downside to this policy however was rampant domestic inflation. Exporting goods at unrealistically low exchange rates means one has to import everything else (e.g. raw materials for goods of production) at much higher prices. With the credit crisis in 2008, those inflation fears came to a halt when the world's asset prices united in a deleveraging process across all asset classes.
But with massive stimulus from the Chinese government using ultra-loose monetary policy, China quickly regained all losses from 2008. (Ed. Note: A big plus of a command economy over a democratic, semi-free market economy is quite simply that things can get done very fast. When China orders its banks to lend, they do lend) Net result: an economy so hot that a number of Chinese Banks were now ordered to stop lending, at least until the end of the month.
Liu Mingkang, head of the China Banking Regulatory Commission (CBRC), said in an interview Jan. 20 that several Chinese banks had been asked to restrain their lending after proving to have inadequate capital reserves. Chinese media reports claimed that new bank loans so far in January have risen to as high as 1 and 1.5 trillion yuan ($146-$220 billion) — approaching or equaling the massive hike in January 2009. As a result, several major Chinese commercial banks (whose names were not given) were given oral commands to stop new lending for the rest of the month.
As far as China is concerned, inflation is definitely back on and along with that, renewed speculation about the revaluation of its currency. Whether China will let its currency appreciate or not is no longer the question but rather when it will do so. That of course is the Million Dollar question and I wish I had an answer. While I cannot foresee when this will happen, there are some additional signs that China is preparing for a second phase of gradual or managed currency revaluation:
An early sign came last year when Brazil and China agreed to use their own currencies in trade rather than settling their dues in US$. A further sign was the fact that the Bank of China, as well as some other Central Banks started to convert more of their foreign currency holdings into a basket of currencies including Euro, Swiss Franc and Japanese Yen. However, a development that went somewhat under the radar was the fact that China stopped buying US treasuries by the middle of last year. As the chart below shows, China has embarked on a decade long buying spree of US Treasuries increasing their holdings from about $71Bn in 2000 to over $800bn in May 2009. Since last summer however, no net purchase were added, instead their holding decreased by over $10bn since. This may indicate a trend of further divesting of US treasuries. http://fxinvestmentstrategies.blogspot.com/2010/01/market-insights-23-january-2010.html
China continues to make news these days. Unabated economic growth has put the country at the forefront of global economic power players. It is now back to double-digit growth barely a year after the worst recession since the Great Depression hit all major financial markets and economies. But despite economic progress, China also continues to mystify foreigners, in particular foreign investors. Personally, I claim no knowledge of understanding Chinese politics, its society and its people nor would I be in a position to advise on the merits of investing in China. Yet, with growth rates at about 10% and a re-ignited property boom, one could easily be tempted into investing - perhaps a Chinese focused Mutual Fund or ETF? But let us take a step back first...
Investing in China, whether directly or via one of the many investment vehicles, comes with a long list of caveats. Even the big multi-nationals (most recently Google) could sing a litany of songs about corruption, red-tape, cultural and language issues, all of which can weigh heavily on investment returns. And how about all the fabulous stories of growth, exuberance and unheard-of property prices?
I find it tough enough to trust the official economic numbers of the US or the European Union, how much more must one question official data from a command economy like China. So let's forget about everything that China says and focus on a few things they have done and continue to do as we speak. I will use a few charts to help illustrate some important milestones....
As late as 1981, China started to actively massage its exchange rate versus the US$ with a clear long-term objective: To devalue the Renminbi to gain a massive competitive pricing advantage for their exports. In 1981, when the US and Europe were united in fear that Japan would be the dominant global economic powerhouse, the Renminbi was trading around 1.5 versus the US Dollar. In subsequent years, the currency was allowed to depreciate allowing the USD/CNY rate to reach up to 8.7 Yuan per US Dollar. A few years back, when the then US Treasury Secretary Paulson argued that the Chinese currency was about 40% undervalued, it was quite an understatement in historic perspective.
CNY
From a macro perspective, the exchange rate movements of the Renminbi are in stark contrast with those of Japan and Germany, two similarly export-driven economies that saw their country rise from economic insignificance after WWII to major export nations by the 1970s and 80s. As their economies grew, so did their exchange rate gain in value against the US$, particularly after the Bretton-Woods agreement was abandoned and currencies were allowed to freely float in the early 70's. The example of the Japanese Yen clearly shows how the Japanese Yen gained about three times the value against the US$ just before Japanese Equities reached their all-time high in 1990.
JPY-historic
China, by contrast, embarked on an export-driven model with a simple principle: produce as much as possible and sell it as cheap as possible. Aided by the 8:1 pricing advantage achieved between 1980 and the mid-90s, China was able to undercut all competing countries while still retaining massive profit margins. The downside to this policy however was rampant domestic inflation. Exporting goods at unrealistically low exchange rates means one has to import everything else (e.g. raw materials for goods of production) at much higher prices. With the credit crisis in 2008, those inflation fears came to a halt when the world's asset prices united in a deleveraging process across all asset classes.
But with massive stimulus from the Chinese government using ultra-loose monetary policy, China quickly regained all losses from 2008. (Ed. Note: A big plus of a command economy over a democratic, semi-free market economy is quite simply that things can get done very fast. When China orders its banks to lend, they do lend) Net result: an economy so hot that a number of Chinese Banks were now ordered to stop lending, at least until the end of the month.
Liu Mingkang, head of the China Banking Regulatory Commission (CBRC), said in an interview Jan. 20 that several Chinese banks had been asked to restrain their lending after proving to have inadequate capital reserves. Chinese media reports claimed that new bank loans so far in January have risen to as high as 1 and 1.5 trillion yuan ($146-$220 billion) — approaching or equaling the massive hike in January 2009. As a result, several major Chinese commercial banks (whose names were not given) were given oral commands to stop new lending for the rest of the month.
As far as China is concerned, inflation is definitely back on and along with that, renewed speculation about the revaluation of its currency. Whether China will let its currency appreciate or not is no longer the question but rather when it will do so. That of course is the Million Dollar question and I wish I had an answer. While I cannot foresee when this will happen, there are some additional signs that China is preparing for a second phase of gradual or managed currency revaluation:
An early sign came last year when Brazil and China agreed to use their own currencies in trade rather than settling their dues in US$. A further sign was the fact that the Bank of China, as well as some other Central Banks started to convert more of their foreign currency holdings into a basket of currencies including Euro, Swiss Franc and Japanese Yen. However, a development that went somewhat under the radar was the fact that China stopped buying US treasuries by the middle of last year. As the chart below shows, China has embarked on a decade long buying spree of US Treasuries increasing their holdings from about $71Bn in 2000 to over $800bn in May 2009. Since last summer however, no net purchase were added, instead their holding decreased by over $10bn since. This may indicate a trend of further divesting of US treasuries. http://fxinvestmentstrategies.blogspot.com/2010/01/market-insights-23-january-2010.html